Deflationary money is a Good Thing

Deflationary money is a Good Thing

Original Postby ajtowns

Posted on: December 5, 2023 15:36 UTC

The email delves into the intricacies of choosing a currency denomination for contracts, particularly highlighting the contrast between using USD and Bitcoin (BTC).

It touches upon the fact that denominating contracts in USD could be subject to adjustments by third parties, which might be avoided by denoting them directly in BTC. This consideration is rooted in the traditional microeconomic argument that advocates for an inflationary currency to automatically reprice existing contracts and mitigate the impact of economic shocks, as explained through concepts such as nominal rigidity and the paradox of thrift. These ideas are discussed on Wikipedia pages dedicated to these topics.

Further exploring the practicalities of currency choice, the sender mentions how central banks play a role in providing stability and predictability for a currency like USD. If the central bank operates effectively and transparently, it can offer a benchmark for the value of BTC in terms of its ability to meet common expenses, such as feeding a family for a week. This allows individuals to focus on their work without the need to constantly adjust their rates in response to the volatility of BTC's value against USD.

The sender posits that while choosing to denominate contracts in BTC is a valid option, its simplicity is contingent on BTC's stability. The flexibility offered in this system allows parties to opt-in to whichever currency they find more straightforward; BTC or USD. For one-off transactions with differing preferences, the process remains simple. However, long-term contracts with parties holding different views can introduce complexities similar to those encountered in international financing today. A notable benefit of this model is the reduced risk to personal savings from poor central bank policies, as opposed to the current financial system where such risks are inherent.